Acting in Concert on Private Standards to Foster Sustainable Development in Value Chains

Compliance with product, service, and process requirements is a must to trade through global value chains. As some of these requirements are operated through private standard schemes, how can the governance and operation of such schemes be improved to support the realisation of sustainable development objectives?

Product and process requirements that are set and/or operated by private companies, consortia, and/or civil society organisations (CSOs), have become a constitutive element of international commercial transactions, as well as a powerful and effective tool to mainstream environmental, social, and economic sustainability considerations in purely economic operations. Frequently referred to as private standards schemes, these sets of requirements may cover physical characteristics and/or processes and production methods for a wide range of goods, and also address the services sector.

Private standards, by definition, do not impose mandatory requirements for accessing a country’s market. Only the government can impose mandatory market access requirements on its national territory, generally by way of laws and regulations. Yet private standards impose mandatory requirements for accessing the consumers or clients of a given distributor, or a specific product/service market. Given that consumers and clients are the “engines” of often long and globalised trains of buyer–seller transactions, known as global value chains (GVCs), the requirements imposed by private standards are of primary concern for GVC players.

Summarising the main findings of a recent study published by ICTSD, the objective of this note is to present a series of policy options to support collective governmental actions on the issue of private standards, with a view to promoting sustainable development through better governance and operation of such standards.[1] Accordingly, the note focuses on private standards with direct and indirect sustainable development objectives or impacts (including on human rights, economic, environmental, or social sustainability, food and product safety, and quality, etc.).

What is the issue of private standards?

The private standard schemes addressed in this note are those that are set and/or implemented by businesses, CSOs, or a combination thereof. There are both confusion and misconceptions as to the nature of the market-access (or rather, buyer-access) problems ascribed to the setting and operation of private standard schemes. In particular, more research is needed on the specific downsides of private standards, disentangled from other general factors hindering access to markets, buyers, and key distribution channels. Nonetheless, taking a closer look at private standard schemes, it can be highlighted that they:

have made significant contributions to the advancement of sustainable development priorities;

may be driven by consumer preferences, businesses’ market penetration strategies, CSOs lobbying, or a combination thereof;

have effects in terms of reputation and trust-creation along GVCs;

are management tools to shift risks, costs, and responsibilities along GVCs; but

are also suitable to be used for the unfair exclusion of smaller or would-be GVC players, while potentially leading to anti-competitive outcomes.

As described in Figure 1, among the elements that can lead to such unfair exclusion, four issue areas can be identified: (1) transparency, (2) economic sustainability, (3) credibility, and (4) potential anti-competitive outcomes.

Figure 1. Pros and cons of private standard schemes

Source: Meliado, Fabrizio, presentation at the event “Realising Inclusive Economic Growth Through Value Chains: The Role of Private Sustainability Standards.” June 2017.

Transparency

Lack of transparency appears as a key failure in the operation of several private standard schemes. While improvements have been observed in the field of company corporate social responsibility (CSR) codes and company sustainability reporting, difficulties linger in terms of access to information relating to compliance requirements and conformity assessment techniques for private standards, as well as to participatory approaches in standard development processes.

Economic sustainability

The economic sustainability of a private standard scheme, particularly from the perspective of a small business that considers whether or not to invest in certification, depends on complex cost–benefit considerations, as well as on the ability of that certification scheme to ensure a minimum degree of interoperability.

The ITC and the European University Institute (EUI) undertook a quantitative observation of the subdivision of certification costs per group of economic operators across a population of 181 voluntary sustainability standards (VSS). They found that in 54.6 percent of these VSS schemes, producers alone bear the total certification costs, whereas for implementation costs this rate increases to 64.4 percent of the observed schemes. Certification costs are shared between producers and GVC players in 26.1 percent of cases, and between producers, GVC players, and the standard-setting system in only 1.7 percent of the observed population. In addition, again over this population of 181 VSS, schemes provide varying types and levels of support, including supporting documentation (166 VSS), technical assistance on the requirements for compliance (105 VSS), technical assistance beyond compliance requirements (50 VSS), and financial assistance to suppliers (only 25 VSS).[2]

In terms of interoperability, the situation appears to be equally, if not more, problematic. Scheme requirements are reportedly often misaligned both with each other, and in relation to regulatory requirements in one or multiple jurisdictions.

Credibility

The credibility of private standards appears to be a function of two distinct variables: (1) the scientific justification of their requirements, particularly with regard to SPS-and environment-related standards; and (2) the conformity assessment/auditing techniques used to certify and maintain compliance. The scientific base of a standard is an important element to justify its necessity and credibility. Yet if the scientific justification even of governmental measures is often problematic and questionable, one can imagine how problematic it can become in the context of private governance initiatives. The credibility of a standard scheme can also be assessed against the verification, auditing, and certification techniques it foresees.

Potential anti-competitive outcomes

Exclusive vertical integration dynamics (whereby large exporters and other downstream players are incentivised to source from larger suppliers, thus excluding potential external suppliers) may materialise, for instance, in the absence of corrective measures such as effective and fair contract farming schemes, or incentives for group certification. These dynamics may take place at various levels moving downstream along a GVC, and to the extent that they can be proven to unlawfully limit competition (under the competition laws of a given national jurisdiction), they can be considered anti-competitive practices. Likewise, the verification, auditing, and certification techniques that accompany the implementation of private standard schemes may also be suitable for abuses of market position.

Building on some of the elements highlighted above, Table 2 summarises some of the factors that play a role in making standards in general “successful,” and compares them with factors that can make private standards more successful.

Figure 2. Factors of success in standards and private standards

Source: Meliado (2017)

Against these considerations, international concerted action on private standards would appear to be justified and desirable. Businesses and CSOs, if left alone by state actors in handling sustainability issues, cannot see the bigger picture in relation to the welfare losses potentially caused by the operation of private standard schemes, while also running the risk of being captured by sectoral interests. However, as discussed in the next section, achieving results based on hard-law reforms at the level of international governmental organisations has so far proved quite difficult, suggesting a need for more flexible approaches.

What lessons can be drawn from multilateral and bilateral experiences?

Concerns related to the market access impact, credibility, design, and operation of certain private standard schemes have been officially voiced at the WTO since 2005. The first element that stands out from a review of the key developments in the 2005–2016 WTO discussions on private standards is the value these talks have created in terms of open global dialogue, issue scoping, knowledge sharing, and awareness raising. Nonetheless, it is a fact that WTO members have not yet succeeded in agreeing on a way forward on the “issue of private standards.” Three factors can help explain the lack of solutions in WTO discussions: (1) the lack of clarity as to the specific nature of the problem being discussed; (2) the fear of agreeing on language that might later be used in WTO disputes; and (3) the excessive emphasis placed on the downsides of private standards.

In this context, three lessons can be drawn from the WTO experience. First, the discussion ought to be focused more pragmatically on trade impacts, i.e. avoiding the risk of getting stuck in semantics. Second, the positive aspects of private standards too need to inform the discussion more prominently. Third, more factual information is needed on the unnecessary or unjustifiable buyer-access hurdles that can be attributed exclusively to private standards.

Beyond the multilateral rules-based system underpinning the WTO, the case of bilateral or small-club free trade agreements (FTAs) is also particularly telling and useful to understand the complexity of bringing about concerted actions to address the potential downsides of private standard schemes. There is indeed limited evidence of FTA norms directly addressing private standards governance issues, whereas less specific attempts to harmonise regulatory approaches on standards and standardisation issues showcase both success stories, as is the case for the conclusion of mutual recognition arrangements in connection with bilateral FTAs, and stories of persistent difficulties, particularly in connection with the harmonisation of standardisation policies across national legal frameworks.

What could be done?

Various options appear to be available to improve the governance and operation of private standards. Six non-hierarchical, mutually reinforcing options for international concerted action on private standards are presented below. They include actions taking place both inside the WTO (options 1–3) and outside of it (options 4–6).

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